Forget the rhetoric, Argentina's debt talks may be too close to fail

Argentina and its creditors may be too close to a debt restructuring deal to fail, even as the government insists there can be no change to its terms.

“Despite the rhetoric from the government, the distance is very small now, and investors’ demands on the legal side are reasonable,” said Alejo Costa, chief Argentina strategist at BTG Pactual in Buenos Aires. “The rational outcome should be a deal.”

The three largest creditor groups teamed up to propose a counter-offer on Monday that would provide more than US$35 billion in debt relief for Argentina over the next nine years. While Economy Minister Martín Guzmán said the creditor groups misunderstand the country’s payment capacity, analysts said the new offer was an opportunity for compromise.

The nation slid into its ninth default in May after missing an interest payment, forcing the government to renegotiate its foreign obligations with Wall Street creditors. Government bonds are trading around 40 cents on the dollar.

President Alberto Fernández told TV Pública after the groups’ statement was released that the country’s most recent offer was its best and final proposal.

“We want to act in good faith and find a solution,” Fernández said. “We’ll continue discussing, but the truth is that we’ve made the offer that is possible.”

Strategists from Goldman Sachs Inc and Morgan Stanley both see about a three cent on the dollar gap between the value of the combined creditor group’s proposal and the government’s offer. Assuming an exit yield of 10 percent, Argentina’s offer reflects 53.3 cents per dollar, while creditors are calling for 56.9 cents, according to Morgan Stanley.

“Both the creditors and the authorities appear to have drawn lines in the sand just a few inches apart,” wrote Goldman analysts including Tiago Severo in New York.

The sticking point may be political with the government boxing itself into a corner, said Joaquín Almeyra, a fixed income trader at Bulltick LLC in Miami. Still, the nation has more to lose from a protracted period of default, which may push them to strike a deal, he said.

“The bondholders already made their statement and showed that they are willing to help, but with limits,” Almeyra said. “It would be a mistake for Argentina if they do not give that final step.”